The first ETFs were created in North America in the early 1990s, tracking the performance of sharemarkets in the USA and Canada. Since then, the number and variety of ETFs have risen sharply as their popularity has increased.
These days there are thousands of ETFs to choose from, providing investors with easy access to sharemarkets around the world. Others are focused on bonds, commodities, currencies and a range of other asset classes. For now, let’s focus on sharemarket -based ETFs.
Investors who want to access the long-term growth of sharemarkets can do so in several ways.
They can buy shares in companies that are listed on a securities exchange, like the ASX in Australia or the Hang Seng in Hong Kong. Investors often prefer to buy companies they know and trust – local banks, insurers and telecoms companies, for example. Owning one or just a few individual shares can be risky however, as unforeseen issues or lower-than-expected corporate profitability can result in disappointing share-price performance.
To help overcome this, some investors prefer managed funds which are offered by professional investment firms. These products typically invest in a broad range of shares, thereby spreading risk across a greater number of companies. While managed funds have many advantages over holding shares directly, some investors are discouraged by the administration requirements or the minimum investment which is typically $25,000.
Sharemarket-based ETFs operate much like managed funds, investing in a diversified range of listed companies, however they do offer key benefits to investors. Management fees can be lower than managed funds, particularly for traditional passive ETFs that track a benchmark. ETFs have other advantages over managed funds, too. Like ordinary shares, ETFs trade on recognised stock exchanges. As a result, they’re easy to buy and sell. Moreover, just like the share prices of listed companies, ETFs are traded on a live basis and the price will reflect the prevailing market price for purchase and sale of units, meaning people can easily track the value of their investment.
With a combination of immediate liquidity (the ability to buy and sell whenever stock markets are open and the ETF remains trading), diversification and ease of access it's understandable that ETFs have become so popular.
Fidelity has recently launched its first active ETF, providing investors with easy access to a portfolio of companies in some of the world’s fastest growing economies.
Sharemarket-based ETFs operate much like managed funds, investing in a diversified range of listed companies, however they do offer key benefits to investors.